Client Update: ASIC announces fintech licensing exemptions
19 December 2016
In brief: As part of its implementation of the 'regulatory sandbox' for fintech companies, ASIC is providing relief for certain fintech businesses from the obligation to hold an Australian financial services or Australian credit licence. Relief may be available for up to 12 months and may be useful to businesses in what ASIC refers to as the 'testing' stage of their development. ASIC has also made some changes to the responsible manager requirements for licensees, which may be particularly useful to 'robo advice' providers. Managing Associate Simun Soljo (view CV) and Associate Jonathan Gardner report.
- What is the regulatory sandbox?
- AFS licensing relief conditions
- Credit licensing exemption conditions
- Other conditions that apply
- Robo advice
ASIC has issued Regulatory Guide 257 – Testing fintech products and services without holding an AFS or credit licence. ASIC says in the guide that the 'regulatory sandbox' for fintech businesses consists of three elements – existing exemptions in the law for small-scale service providers, new exemptions provided under licensing relief instruments, and the ability to get individual relief from ASIC. The regulatory guide deals with all three, but this update focuses on the new relief instruments.
The licensing relief will be contained in two new legislative instruments which are yet to be registered and so not yet publicly available, but they are summarised in the regulatory guide.
Eligible fintech businesses can rely on the relief for a 12-month 'testing period' without needing a licence (this is up from the 6 months proposed in the regulatory sandbox consultation paper). The period beings 14 days after the business notifies ASIC it intends to rely on the exemption, but this is subject to ASIC confirming the date. The notification to ASIC needs to be accompanied by certain information, including bankruptcy and criminal history checks for directors, and confirmation of external dispute resolution scheme members and adequate compensation arrangements (discussed further below). Basic information about the business, including contact information, will be published by ASIC on its website.
The relief from the requirement to hold an Australian financial services licence applies to those providing financial product advice and to those dealing in (but not issuing) the following financial products:
- listed or quoted Australian securities;
- simple managed investment schemes;
- deposit products;
- home contents insurance products, and personal and domestic insurance products; and
- payment products issued by ADIs.1
The relief does not apply to services in relation to other products, including superannuation and life insurance products.
The relief is available in respect of deposit products, simple managed investment schemes, securities and payment products if exposure of each retail client is limited to $10,000. The sum insured under a general insurance contract in relation to which services are provided to retail clients must also be limited to $50,000.
Only those businesses that do not already hold a licence and who are not representatives of a licensee can rely on the relief. ASIC will have the power to issue a notice that a person cannot rely on the relief, and given that the purpose of the relief is to assist fintech businesses, it says that it may give a notice to a business if it is not 'innovative' or does not use technology when providing financial services or credit.
Providers of personal advice will still need to comply with the best interests duty and related obligations under the FOFA provisions in the Corporations Act 2001 (Cth).
The credit licensing exemption applies only to fintech businesses providing credit services that consist of acting as an intermediary or providing credit assistance. It does not apply to the issue of credit.
It applies in relation credit contracts that:
- have maximum amount of credit is no more than $25,000;
- have a maximum annual cost rate of 24 per cent;
- are not subject to tailored responsible lending obligations (ie is not a reverse mortgage or a small amount credit contract);
- are not a consumer lease; and
- are not secured over residential property.
Providers of credit assistance will still need to comply with the responsible lending obligations.
In addition to the above conditions, businesses relying on the licensing relief must:
- Provide services to a maximum of 100 retail clients. There is no maximum for services to wholesale clients.
- Comply with a cap of $5 million on the total exposure of all clients to whom services are provided under the relief.
- Comply with special disclosure requirements, including warning clients that the service provider does not hold a licence, and also provide disclosure of some information usually set out in a financial services guide or credit guide, including about remuneration. Providers of credit assistance will also need to give a quote and a proposal document.
- Have adequate compensation arrangements in place, including a requirement to have a minimum of $1 million in professional indemnity insurance cover, and to take reasonable steps to obtain run-off cover for a period of 12 months.
- Have internal dispute resolution procedures in place which meet ASIC's requirements and also be a member of an ASIC-approved external dispute resolution scheme (like the Financial Ombudsman Service). They must give details of the external scheme when giving notice to ASIC of their intention to rely on the relief.
While undoubtedly ASIC is concerned to ensure consumers are adequately protected, the restrictions on the relief will also limit its usefulness for many businesses. Activities will need to be carefully reviewed and structured to ensure the terms of the relief are complied with. The relief will be most useful to those who meet the conditions and plan to apply for a licence but want to start operating their business immediately.
Businesses relying on the relief must cease operating at the end of the 12-month relief period if they haven't obtained a licence or been appointed a representative of a licensee or obtained an extension or exemption from ASIC by that time. Given the unpredictability of the licensing application process, we expect many who seek to rely on the exemptions may find themselves caught short.
At the same time, ASIC has released updated guidance on how licensees can satisfy the requirements to maintain competence to provide services. The guidance is set out in Regulatory Guide 105 Licensing: Organisational competence and Regulatory Guide 206 Credit licensing: Competence and training.
ASIC will now allow ‘small-scale, heavily automated businesses’ – essentially robo-advisers who have provided services to fewer than 1000 clients – to meet the requirement by nominating a responsible manager who does not have day-to-day involvement in the business but who provides regular sign-off on the licensee's processes and systems and the quality of financial services provided.
- Each of these have special meanings under RG 257. See RG 257.64.
- Simun SoljoPartner,
Ph: +61 2 9230 4635
- Gavin Smith
Co-Practice Leader, Startups and Emerging Companies
Ph: +61 2 9230 4891
- Valeska Bloch
Co-Practice Leader, Startups and Emerging Companies
Ph: +61 2 9230 4030
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